@MASTERSTHESIS{Kaulich2009,title = {Diversification and Economic Development}, author = {Florian Kaulich}, year = {2009}, url = {http://othes.univie.ac.at/5765/1/2009-07-08_0225548.pdf}, language = {EN}, institution = {University of Vienna, Austria}, abstract = {This study analyses the relationship between economic specialization and the level of income per capita and, in particular, tests the hypothesis of a U-curve between the two. In the respective literature, economic arguments and political advice are presented in favour of specialization as well as diversification. Recent empirical studies propose that both forces are relevant, albeit at different levels of income per capita. Low-income countries diversify their production with rising income per capita until they reach a certain level of economic development, at which point specialization sets in, thus resulting in a U-curve. This pattern has been confirmed for the production structure as well as that for exports, but some studies criticize the measures and methodology used in this context. The econometric analysis in this study shows that the conjectured U-curve is not robust, as it depends on the dataset used and specialization measure applied. Even in cases where a significant U-curve is observed, it is driven by country-specific fixed effects rather than within-country variation. While it can be shown that low-income countries diversify their production and export structure as income per capita rises, no robust conclusions can be drawn concerning a trend towards re-specialization for high-income countries. Controlling for other determinants reveals that the within-country variation is rather determined by factors other than income per capita. Accordingly, the proposed U-curve does not represent the "development path" of an average country.},}

Abstract

This study analyses the relationship between economic specialization and the level of income per capita and, in particular, tests the hypothesis of a U-curve between the two. In the respective literature, economic arguments and political advice are presented in favour of specialization as well as diversification. Recent empirical studies propose that both forces are relevant, albeit at different levels of income per capita. Low-income countries diversify their production with rising income per capita until they reach a certain level of economic development, at which point specialization sets in, thus resulting in a U-curve. This pattern has been confirmed for the production structure as well as that for exports, but some studies criticize the measures and methodology used in this context. The econometric analysis in this study shows that the conjectured U-curve is not robust, as it depends on the dataset used and specialization measure applied. Even in cases where a significant U-curve is observed, it is driven by country-specific fixed effects rather than within-country variation. While it can be shown that low-income countries diversify their production and export structure as income per capita rises, no robust conclusions can be drawn concerning a trend towards re-specialization for high-income countries. Controlling for other determinants reveals that the within-country variation is rather determined by factors other than income per capita. Accordingly, the proposed U-curve does not represent the "development path" of an average country.